Adjustments can be done in variety of ways & depends totally at the discretion of the trader. To get a clear mind we need to know the following:
1) What to follow, 2) How to make the adjustment, 3) When to make the adjustment. (1/5)
1) We need a way to measure the imbalance created by a delta move in an option strategy. We can measure through premiums, distance from index or delta of greeks (i personally use delta). So basically whatever way of measure we use, both sides should be equal in it. (2/5)
2) Adjustment can either be done by selling extra quantity of profitable side, buying the quantity of losing side or shifting both the sides. I personally shift the sides because with extra quantities our Gamma gets imbalanced & the risk increases if market reverses. (3/5)
3) While the first 2pts are objective, when to make an adjustment is totally subjective. It can be fine tuned through experience. It also depends upon what strategy u are using. For a short strangle the adjustment required is faster than a ratio spread or an IC. (4/5)
Adjustments are a vital part of option trading & the goal should be to adjust spontaneously without any hesitation. A good adjustment system can save you from wild delta moves & even put you on the profitable side. But it takes practice in live trading to develop one. (5/5)
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Volatility can rise in different ways. Below are few scenarios which i remain mindful of during market.
1) Small delta move, rise in IV
This is not usually a dangerous scenario because you have received more premiums, though MTM is momentarily -ve.
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2) High delta move, rise in IV
Major damage happens in such scenario in non-directional & the loss also becomes irrecoverable. Usually this scenario happens in a persistent low realisation environment where adjustment cost is high.
Good opportunities come after this move.
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3) High delta move, IV remains stagnant/less decay
This is a very dangerous scenario as due to high index moves the adjustment cost has increased but because IV didn't rise, there's no addition to the premiums you've pocketed.
Option traders find a strategy & backtest it for 10+ years to see how it performed through various combinations of entry, exits, SLs.
One has to understand that market regimes keep changing after 3-4 years.
What worked in 2017 doesn't work with same effectiveness in 2021.
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Looking back i was a completely different trader in 2008 to 2015 to now. Ofcourse one keeps improving his skills but it also happens because markets keep evolving.
Whatever strategy works for a particular time period loses it's edge as more people start pouring into it.
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Therefore one needs to keep reinventing himself each time a regime changes. You could do very well in one period but fail miserably in another, thus not being able to sustain in the longrun.
This is primarily because one lacks understanding of basic structures of a strategy.
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There are times when i have traded exclusively in bnf for atleast a couple of yrs, when the weeklies got introduced.
Stopped trading in it for an yr when nf weekly got introduced & bnf started having price freeze issues on expiry days.
Idea has always been to master just one index.
Before the introduction of bnf weeklies, there was no other choice than nf monthly options. Bnf monthly didn't have good liquidity as compared to nf at that time.
Even next month nf options had better liquidity than bnf options.
But now the liquidity is not an issue in any of the index. Option prices don't freeze in bnf anymore.
Currently I'm flexible enough to trade in both, many a times switching from one to another in intraday itself.
Have also tried cross hedging them, but the results were varied.
Survivorship bias is the tendency to analyze the strategies that performed exceptionally well and ignore all those that didn’t reach our criteria. We have an inclination towards focusing on the survivors, even if they survived out of luck rather than viability.
So basically we are testing our ideas on an incomplete data. The missing data may conceal losing trades or winning trades, causing us to deploy a strategy which we shouldn't or vice versa. Backtest results with this bias will not represent the true picture.
So if we have a backtested strategy with SL on a 5 min time frame (or even 1 min for that matter), it may give a totally different outlook to the actual result. The period in between which is not taken into account can give vicious price movement hitting the SL multiple times.
We have this perception that Options are relatively new trading instruments, but they actually go back to the times before Christ was born. Getting to know the origins of this fascinating trading instrument can help us appreciate the depth of it.
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The very first account of options was mentioned in Aristotle's book named "Politics", published in 332 B.C. That's how far back humans have used the concept of buying the rights to an asset without necessarily buying the asset itself.
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Aristotle mentioned a man named Thales of Miletus who was a great astronomer, philosopher and mathematician. Thales was one of the seven sages of ancient greece. By observing the stars and weather patterns, he predicted a huge olive harvest in the year that follows.
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